Sep 9 / Lívea Coda

A lot discussed, little changed

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"Raw sugar prices are struggling to break the 20c/lb level, needing significant bullish news for a decisive upward move, as last week's weakness in the energy sector and market bets on a smaller rate cut (25 bps) than initially projected may be overshadowing bullish developments. While prices saw a modest rise due to a correction in the U.S. dollar, India's potential export ban did not have the anticipated impact, with sugar losing its gains and finishing the week lower than 19c/lb. The market seems skeptical, while Brazil is flooding the market with sugar with its fast-paced crop, allowing traders to sit and wait."

A lot discussed, little changed

  • Raw sugar prices are struggling to surpass the 20c/lb level and may need significant bullish news for a decisive upward movement.

  • India's potential export ban has raised questions about its sugar export intentions, as the government prioritizes achieving a 20% ethanol blending target by 2025/26, though the market remains cautiously optimistic about possible exports.

  • To enable exports, prices would likely need to exceed 20c/lb, with mills potentially demanding a premium, driving raws to breach 21c/lb, which could pressure the government to allow exports if production exceeds estimates.

  • Brazil's production has been impacted by drought, affecting cane quality and sugar mix expectations, while the country keeps a strong export pace reaching 3.9Mt in August, providing short-term comfort to the market.

  • As October's expiry approaches, declining open interest may lead to movement in spreads, as funds start their position rolling.

Raw sugar prices struggles to break through the 20c/lb level, likely needing more substantial bullish news to make a definitive move upward. Last week, weakness in the energy sector and broader macroeconomic concerns overshadowed some of the bullish signals that emerged. While prices did see a modest rise following the U.S. dollar's correction on Friday, which was triggered by weaker-than-expected U.S. employment data for August and a stabilization in expectations for interest rate cuts, other news, such as India's sugar export ban, did not have the market-moving impact that some anticipated, with raws ending the week at a lower tone.

As the world's second-largest sugar producer, behind only Brazil’s Center-South region, India has reignited one of the market's central questions: will it export sugar? The government has indicated its intention to prohibit exports, prioritizing the goal of achieving a 20% ethanol blending target by 2025/26. However, market consensus suggests that global trade flows will likely need India’s participation, especially after Brazil’s production was impacted by recent droughts.

Image 1:Sugar vs. WTI: A resilient commodity

Source: Refinitiv, Hedgepoint

Image 2: Dollar correction and sugar prices

Source: Refinitiv, Hedgepoint

The lack of a final decision leaves room for the market, and for us, to stay cautiously optimistic about potential Indian exports, which could offset some of the Brazilian intercrop tighness. For India to export, prices would likely need to surpass the 20c/lb mark. Given the current domestic market prices and expected international trade flows deficit, Indian mills may demand a premium, pushing the export parity above 21c/lb. If the market is willing to pay, wouldn’t the government feel pressured to allow exports?

They might, especially if production exceeds the average estimates. We could see a surprise on the upside, similar to last season when many predicted a crop below 30Mt due to the worst August monsoon in a century, only for production to reach 32Mt after factoring in ethanol diversion. This uncertainty might be the reason why sugar prices didn't react to Friday's news.

A word of caution, however: if any export allowances are granted, they will likely come after the new season starts and gains momentum. Once stocks are replenished and the government recognizes a higher supply than initially expected, there could be a change of heart. In fact, India has already allocated 8.6kt of sugar for export to the U.S. under the scheme for the 2025 fiscal year. While it's a small quantity, it's still a noteworthy development. Meanwhile, monsoon has been great, even taking its time to withdraw, what is positive for cane’s development.

Image 3: Indian export parity

Source: Bloomberg, Hedgepoint

As we await further developments and confirmation, the key bullish driver remains the Brazilian weather, which is proving to be a significant factor. Despite a recovering Northern Hemisphere, Brazil's Center-South region has underperformed due to drought, which has affected cane quality more than anticipated, lowering sugar mix expectations.

The challenges in sugar production and reduced raw material availability are likely to extend the intercrop period, adding bullish pressure to the March contract. However, in the short term, the rapid pace of the season has enabled the country to maintain an extraordinary level of exports, with SECEX data indicating a new record of 3.9Mt for exports in August. This level of supply adds short-term comfort to the market, allowing its players to remain calm and vigilant to India’s and other country’s developments.

Regarding the Octorber’s expiry, its open interest continues to decline. We can expect some movement in the spreads throughout the week as official fund rolls begin.

Image 4: Open Interest behaviour through September (Thousand)

Source: Refinitiv, Hedgepoint


In Summary

Raw sugar prices are struggling to break the 20c/lb level, needing significant bullish news for a decisive upward move, as last week's weakness in the energy sector and market bets on a smaller rate cut (25 bps) than initially projected may be overshadowing bullish developments. While prices saw a modest rise due to a correction in the U.S. dollar, India's potential export ban did not have the anticipated impact, with sugar losing its gains and finishing the week lower than 19c/lb. The market seems skeptical, while Brazil is flooding the market with sugar with its fast-paced crop, allowing traders to sit and wait.

Weekly Report — Sugar

Written by Lívea Coda
livea.coda@hedgepointglobal.com
Reviewed by Victor Arduin
victor.arduin@hedgepointglobal.com
www.hedgepointglobal.com

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